Why Standard Chartered plc Looks Set To Divest Heavily

Royston Wild evaluates what Standard Chartered plc’s (LON: STAN) precarious capital pile means for future earnings.

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Today I am looking at why investors should not expect Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US) to turbocharge its asset base any time soon.

Huge divestments on the cards

Standard Chartered has suffered heavily in recent times due to its huge reliance on developing regions, particularly across Asia and Africa. The bank saw pre-tax profit slump 7% in 2013, to $7bn, as turbulence in these markets continues to build, prompted not only by economic cooling but a stepping up of banking regulations.

The bank has targeted Africa in particular as a huge revenues driver in future years — the bank extended its Saadiq Islamic banking brand into Africa earlier this month by rolling its niche product suite out in Kenya. But I do not believe that investors can expect the firm to chuck shedloads of cash in order to build its activity in emerging markets.

The company has hardly been prolific on the M&A trail in recent times. Standard Chartered’s sole purchase last year was the $36m purchase of Asba Bank’s custody and trustee division in South Africa.

Rather, I expect Standard Chartered to continue to spin off an array of non-core assets in order to mend its beleaguered balance sheet and build its capital ratio, not to mention stave off the possibility of being forced into yet another rights issue.

Indeed, The Telegraph reported that the bank has put its Prime Credit consumer banking division in Hong Kong arm up for sale in recent months, while it is also seeking bidders for its businesses in Germany, Switzerland and Lebanon.

Exploding earnings

Still, City analysts expect earnings to explode in the medium term, with a 28% expansion pencilled in for 2014 and a further 9% advance expected next year.

These projections leave the bank dealing on P/E multiples of 9.3 and 8.5 for these years, comfortably within bargain territory below 10. In addition, price to earnings to growth (PEG) readouts of 0.3 and 1 for 2014 and 2015 respectively — below or in line with the value benchmark of 1 — underlines its terrific cheapness relative to its growth prospects.

However, a tentative increase in the full-year dividend in 2013 indicates that Standard Chartered is expecting further troubles ahead. The payout rose just 2% last year, a vast deterioration compared with a compound growth rate of 8.4% during the previous four years, and a worrying sign over the degree of purse tightening underway at the bank.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in Standard Chartered. The Motley Fool owns shares in Standard Chartered.

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